In simplest terms, there are three types of risk.
- Third Party Risk
- Business Risk; and
- Personal Risk
Third Party Risk is the risk a business and each owner owes visitors, customers and the public in general. For Example:
- A business owner is asked to sign a property lease which includes an Indemnity Clause which requires the tenant to reimburse the landlord for any injury or damage caused to anyone anywhere in the building complex. While most businesses have public liability coverage for their own shop, factory or office, most policies will not cover injury or damage arising in common areas. This additional third party risk becomes a personal risk to the owners of the business.
- A supply agreement for a major client of your business provides an Indemnity to the customer, this contractual liability is unlikely to be covered by your standard Public Liability policy. As soon as it is not covered the Third Party risk becomes a personal risk to the owners of the business.
With Business Risk, if the assets of the business are not fully insured and if adequate business interruption insurance is not in place, the question arises: who is going to get what is left? The bank and/or finance companies, or the owners of the business? In most cases it is the bank and this means that there is a large personal loss (risk) to the owners of the business.
Personal Risk is the risk that sheets home to an individual putting their home and other personal assets at risk.
At the end of the day, by transferring as much of the Third Party Risk, and as much of the Business Risk as possible to an insurer, the Personal Risk of the owners and other stake holders (eg employees, directors etc) of the business are much reduced.